finances

A key argument for breaking the Cleveland Clinic’s lease on Lakewood Hospital and closing the facility has collapsed – courtesy of the Cleveland Clinic.

Tuesday’s Lakewood Observer broke the story of a Cleveland Clinic document acknowledging, unambiguously, a $278 million liability to the city under a lease which Lakewood council members voted to discard as part of the deal that closed the hospital.

Cleveland Clinic document obtained in legal discovery process

As the story’s author Brain Essi notes, the Clinic document completely disproves arguments that Lakewood Hospital could not have remained open through the lease’s 10 remaining years. Lakewood city law director Kevin Butler’s contrary opinion was, Essi adds, “the most important reason cited by City Council when they authorized Butler to negotiate” an agreement terminating the lease and closing the hospital.

The Observer story has city officials who helped craft and support the hospital deal scrambling, as painfully obvious shortcomings leave voters wondering what motivations lie behind such a bad deal. In four weeks, Lakewood voters can reject the deal that closed the hospital by voting against issue 64.

Essi’s front-page story about the deal presents multiple reasons for a vote against 64. In addition to the $278 million liability, another document discovered during an ongoing lawsuit predicted that closing the city’s hospital would shift 5,000 patient visits to Clinic-owned hospitals, bringing an extra annual profit of $11.5 million for the Cleveland Clinic System.

In comparison, the Clinic paid only $9.6 million to acquire hospital assets and associated benefits, Essi suggests. Citing the city’s own Combined Annual Financial Review, Essi says that “The CAFR was prepared by the State Auditor’s office so the $9.6 million number is not subject to debate.” The report is particularly inconvenient for supporters of the hospital deal, who have claimed that it brings Lakewood more than $100 million in new investment.

Essi’s background compounds the difficulty in defending the controversial hospital closing. A licensed attorney since 1984, Essi has long experience with complex sales and issues of liability. He is also a director of a medical practice. By his own estimate, Essi has spent more than 2,000 hours on the Lakewood Hospital issue on a volunteer basis. Essi is available for interview.

Public opinion is not in city hall’s favor as more and more Lakewood citizens plan to vote against issue 64.Read More

Lakewood can’t be saddled with debt, because Lakewood Hospital was not in debt. Nor will the city be required to run Lakewood Hospital at a loss. The hospital was never taxpayer-subsidized in more than 100 years, and in fact made consistent profits that benefited the community up until the last year of Cleveland Clinic management.

Voting against Issue 64 won’t land the city with huge legal bills, either. Fighting over Lakewood Hospital in court has actually been the choice of the groups who support 64, again and again.

In this and other ways, the Issue 64 plan is the real drain on Lakewood’s finances and taxpaying public.

The ongoing project to turn Lakewood’s publicly owned hospital into a private health center has a big price tag. Selling people a deal they don’t want is expensive: consultants, advertising, direct mail, etc. Add fees on top of more fees, and the asset write-downs of a no-bid deal.

Then quietly charge it all to taxpayers.

This has been the consistent story behind closing Lakewood Hospital, so far. It’s also the simplest, bottom-line argument for voting against the deal in November and introducing some fiscal discipline to a pricey boondoggle. The direct costs, alone, already run into the hundreds of millions.

For a real sense of the scale of this deal’s expense, it may help to start small and work up from there.

$300: the approximate hourly rate paid by Lakewood to Thompson Hine beginning in April 2015, “in connection with negotiations with the Cleveland Clinic Foundation and Lakewood Hospital Association, Inc., relating to Lakewood Hospital.” Between then and the negotiated deal announced six months later, a three-digit total of billable hours seems plausible, at least.

In the following statement Marguerite Harkness, CPA and Committee Chairperson reaffirmed that Lakewood Hospital could easily be a profitable business if operated properly.

“The Clinic had increased administrative fees by 718% from 2002 to 2014 without providing any explanation. Last year, Lakewood Hospital handed over more than 24 million dollars in fees that the Clinic refused to account for. Any health care provider would have loved the deal the Clinic had, charging whatever it pleased without accountability.

“Free of these excessive fees, we confidently estimate hospital earnings of 18 to 20 million dollars annually before depreciation. That could add up to a 14% return on net patient revenue. The conclusion is clear. The hospital could easily operate at a profit. Otherwise why would three health care operators be so interested in running Lakewood Hospital? There was no open bidding. Serious suitors were coldly rejected. It only makes business sense to have considered these proposals. Instead, the city turned the hospital over to the Clinic for pennies on the dollar. You don’t have to be Warren Buffett to figure out that this is a horrible deal.”

– Marguerite Harkness, Chairperson, Save Lakewood Hospital Committee

A referendum vote to repeal the deal that closed Lakewood Hospital will appear on the November 8, 2016 ballot.

The deal to break up Lakewood’s publicly owned hospital and privatize most of the pieces fails our community, in multiple ways.

But at the most basic level, the deal also fails a test of simple arithmetic: even from a short-term, cold hard cash perspective, Lakewood comes up short by at least $80 million.

The combined fair market value of all our hospital property, rights and associated assets is at least $120 million.

A study of hospital sales by Subsidium proposed a $70 million value for our hospital, based on averaging recent hospital sales. (It seems reasonable to use this figure, rather than one based on “distressed” hospital sales, given that University Hospitals recently paid $45 million for one-half of St. John’s Hospital, which has 204 bed licenses compared with Lakewood’s 240.)

Under the terms of the Cleveland Clinic’s lease on Lakewood Hospital, all of this would revert to Lakewood upon termination of the lease. In comparison, a generous assessment of the deal’s compensation to Lakewood adds up to only $40 million.

Including cash payments and potential income from selling the hospital site, Lakewood receives about $23 million from the deal.

If money placed in a new health foundation (which will not be owned by the Lakewood public) is included, this adds nearly $17 million to the deal’s financial benefits.

You don’t have to be smarter than a fifth grader to complete the math:

$120 million-$40 million $80 million in public assets transferred into private hands without fair compensation